China Says Deal, Tariff Man Says No Deal

Mon, Nov 11, 2019 - 12:07pm

Originally posted at ExecSpec.net

Has there ever been a bull market in stocks more connected to the words of one person? Presidential palaver and Trumpian tweets frequently rule day-to-day market action. In recent months the words coming from the Oval Office have repeatedly pushed stock prices around in a 10% range.

In early August, when trade talks with China stalled, the self-proclaimed ‘tariff man’, Trump threatened even more tariffs, sending stock indices lower by 8% in just over three days. On the day of the Aug. 6 low, Trump reversed the decline by stating he’ll reduce tariffs as a trade deal progresses, sending stocks back up 6% in just three days.

During the persistent 7% stock market rally over the past month, Trump has made weekly updates to increase confidence in a coming trade deal with China. It’s no secret that the uncertainty of an escalating trade war with China has been perceived as the biggest threat to the U.S. stock market and economy since 2018.

Without personal prejudice to the decisions emanating from this administration, we conclude that Trump is well-aware of the impact his words have upon investors and has been a master political minefield navigator. After juicing the economy on pro-business rhetoric and major tax cuts in 2017 and 2018, Trump helped slow the economy with his creation of a trade war with China.

Trump knows the consumer and stock market investor are paramount to his success and to securing a second term in office. He has consistently found a way to bring stocks back to record highs even after he causes a preceding price decline. As the chart below clearly highlights, words matter as there have been frequent comments from Trump at every major trend change in equities that have immediately propelled prices in sync with publicly expressed presidential sentiment. China indicated they had agreed to a trade deal last week while at record highs in the stock market, Trump quickly responded that there is no deal and no change in tariffs – yet.

Source: ExecSpec. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

As in the first quarter when stocks persistently shot higher, Trump has again been signaling a strong perception of a partial deal with China over the next month or so, which has kept economic and investor optimism elevated. Everyone’s been fooled throughout this public relations manipulation game the president plays incredibly well, but it certainly appears the first stage of a major trade deal is forthcoming.

We are once again reaching a key inflection point for a make or break decision on December tariff hikes that must be addressed. Any break in trade talks with a new round of trade war escalation in December will be received with alarm by investors and may lower economic prospects as well. However, until there are new threats of more tariffs, the stock market is unlikely to sell off more than a few percent. As we show in our S&P 500 daily chart above, there has been an impressive technical breakout in the major indices that support another 3% to 6% higher move in valuations from here if a phase one U.S.-China trade deal is signed.

While Trump has been an adept conductor of investor and consumer expectations at very high levels regardless of fundamentals, it’s worth noting the overbought technical indications developing now. Options traders, small investors and a variety of momentum and sentiment related oscillators are at or near levels that imply resistance to higher stock index prices and a growing risk of a correction. S&P 500 Index 3100 is the current short-term resistance to watch. Our primary sentiment gauges are highlighted in the weekly chart below. There is room for more euphoria from small investors, but stocks are currently vulnerable to any adverse tweet coming out of our commander-in-chief.

Source: ExecSpec. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

On Oct. 11 Trump said, “we’ve come to a very substantial phase one deal, … a tremendous deal for the farmers. A purchase of — from 40 to 50 billion dollars’ worth of agricultural products. … would be two and a half times what China had purchased…” Trump’s agricultural claims are actually quite accurate. This would indeed be a major boost to soybean crop prices upon a trade deal. Not only would soybeans be a good investment upon a phase one trade deal, but a breakout over $10 will be a strong sign of an end to the trade war and a better environment for stocks and the global economy.

Source: ExecSpec.net. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

Another modest clue of trade deal confirmation confidence will manifest in copper prices. As markets become more assured of a China deal, we should see copper move above the $2.70 to $2.80 summer resistance zone with $3 being surpassed once a deal is actually inked.

Source: ExecSpec.net. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

Never has there been a U.S. president so active using social media and the press to shape consumer and investor expectations and to conduct policy initiatives. This can lend to confusion and more sudden market reversals based only on the positive or negative statements promulgated by the Oval Office.

While our interpretation of technical and fundamental indicators remains relevant, it’s clear that frequent commentary by Trump is also quite valuable in shaping the outlook for the stock market and other commodities. Currently our tweeter in chief’s rhetoric is conveying cautious optimism, maintaining expectations of a trade deal, while saying there is no urgency.

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